Fed leaves interest rates under 1.75 percent following May meeting

Posted May 03, 2018

The Fed, under the leadership of new chair Jerome Powell, faces a tricky path ahead as the central bank wants to encourage growth but not trigger a recession.

The Fed announcement offered few surprises, as the central bank left interest rates unchanged at 1.5 to 1.75 percent and signaled that an interest rate hike is likely in June. So perhaps the U.S. Federal Reserve's decision to hold steady on its key interest rate - while making it quite clear that its next increase is so close you can nearly touch it - foreshadows what could be a near carbon-copy message from the Bank of Canada in its rate decision later this month.

The committee most recently raised rates by 25 basis points in their March meeting.

(Kitco News) - A cautious Federal Reserve, not anxious to raise interest rates faster than expected, is breathing new life into the gold market as prices bounce off recent four-month lows. The Fed has been predicting inflation would pick up for several months after it unexpectedly fell in the latter half of 2017.

"Markets are pretty much focused on the symmetric language, that's kind of code for willing to let them overshoot their inflation target", said Mark McCormick, North American head of fx strategy at TD Securities in Toronto. The Fed's policymaking committee noted that "overall inflation and inflation for items other than food and energy have moved close to 2 percent".

Benchmark 10-year notes last rose 3/32 in price to yield 2.9644 percent, down from 2.976 percent late on Tuesday. It also highlighted that the job gains have been strong in recent months, and the unemployment rate stayed low.

Inflation isn't soaring, by any means. This may be a little confusing to Fed officials because wages should be increasing as employment decreases.

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"I think a June rate hike is a done deal unless something dramatically changes between now and June". The Fed had last increased rates in March. In its March statement, the Fed indicated business investment had "moderated" from a strong fourth quarter.

The US grew at a bit slower pace (2.3 per cent) in the first quarter on a yearly basis after clocking an average growth rate of 2.3 per cent in the previous three quarters. Governor Stephen Poloz and his colleagues already showed a willingness, in January, to raise rates in the same breath with which they profess caution about raising rates.

"The labor market has continued to strengthen", the Fed said. However, it downplayed the recent slowdown in economic and job growth. But monthly payroll gains have averaged a solid 202,000 so far this year.

The country's unemployment rate is now at a 17-year low of 4.1 per cent.

The next rate increase is expected in June. It raised rates once in 2016, but lifted borrowing costs three times a year ago amid a strengthening economy and labor market. More hikes can crimp borrowing and economic activity and make bonds relatively more attractive compared to riskier stocks.

The British pound and the euro traded lower.

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